The Tribune

By CHRIS ILLING

CCO @ ActivTrades Corp

Despite the tight monetary policy, the boom in the US job market continues unabated and is once again fuelling concerns about further interest rate hikes among financial markets players. A total of 336,000 new non-farm jobs were added, almost twice as many as many economists had expected. In addition, according to revised government data, there were around 120,000 more jobs in August and July than initially reported.

The strong increase in employment surprises economists. The likelihood of a further interest rate hike by the US Federal Reserve is increasing, and the stock and bond markets reacted promptly.

The US dollar strengthened against most major currencies. On Thursday last week, the euro fell to an intra-day low of $1.0483. US Treasury yields rose sharply. The German Dax gained around 1 percent during the last trading day last week, and closed at 15,229 points. All three major US stock indexes were moving higher on Friday. The 10-year Treasury yield surpassed its highest level of the year. It surged after the jobs report to 4.858 percent, the highest since July 2007, before easing back to 4.775 percent. The probability of a further interest rate hike in the current year was estimated at around 50 percent. Prior to the jobs report, the chance had only been priced in at about 34 percent.

The US labour market is proving to be unexpectedly robust. So many new jobs have not been created in a month since January. The rapid rise in interest rates that we have seen (550 basis points in 18 months) still has not dampened the US economy and job market, and consumer spending is more resilient than expected.

It was also not so important that the separately-calculated unemployment rate remained at the previous month’s level of 3.8 percent in September. Experts had expected a decline to 3.7 percent.

The US Federal Reserve is fighting high inflation with a tight monetary policy line. At the same time, it wants to cool down the hot labour market without choking off the economic engine. After some strong interest rate hikes, the central bank recently left the key monetary policy rate in the range of 5.25 to 5.50 percent, but kept the door open for further interest rate hikes.

The incoming inflation and labour market figures are important benchmarks for the future interest rate path. With inflationary pressures in mind, the Fed is also keeping a close eye on wage growth. Average hourly wages rose by 4.2 percent in September compared to the previous year. Compared with the previous month, there was an increase of 0.2 percent in September. Economists had expected an increase of 0.3 percent.

The resilience of the labour market has already surprised Fed officials and poses inflation risks in the medium-term, especially since wage increases have also remained respectable. From the point of view of the US Federal Reserve, the employment momentum has not yet weakened sufficiently and a key interest rate hike is therefore still in the air.